What’s so exciting about tax credits?

How are they different from tax deductions?

Tax Credits are awesome!  I mean, who doesn’t like getting a good deal or the opportunity to take advantage of free money?  Essentially, that’s what tax credits are – free money – money that is subtracted from the amount you owe in taxes.  Take, for example, the current 30% Federal Tax Credit on the installation of a qualifying GHP (Geothermal Heat Pump) system.  If you are an average homeowner, your geothermal tax credit would average around $7,500; based on a $25,000 geothermal system installation.  So your tax liability, the amount you owe in federal taxes, would be reduced by $7,500.

Many homeowners confuse tax credits with tax deductions because both help you pay less income tax.  However, the main difference between the two is that tax deductions are subtracted from your gross income, reducing your final tax liability within your marginal tax rate.  For example, an individual in a 15% tax bracket would save $0.15 for every marginal tax dollar deducted. However, a credit would reduce the tax liability by the full $1.  This is what makes tax credits preferred over deductions.

At the end of the day, the government implements tax credits and deductions as a way to encourage specific behavior, such as replacing a fossil fuel burning furnace with an energy-efficient geothermal system; and as a taxpayer, you should take full advantage of every tax incentive you can qualify for.  Before filing your income tax return, it’s also important to double-check the tax credit or deduction eligibility requirements and to consult with your tax professional with specific questions.

Oh, one last thing!  The 30% Federal Tax Credit on geothermal systems, the tax credit that’s been helping homeowners for 8 years, is scheduled to expire at the end of this year – December 31, 2016.  This tax credit has been extremely popular because it has given homeowners an opportunity to afford the most energy-efficient, environmentally friendly, sustainable HVAC system on the market today – Geothermal.  Now that’s huge!

But as the saying goes, “All good things must come to an end.”

For more information on the Federal Geothermal Tax Credit, visit https://www.energystar.gov/products/geothermal_heat_pumps



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